January 15, 2014. Crain’s New York Business quoted FPI’s James Parrott in a news article on a report by the Business Council of New York State’s Progressive Policy Institute that touted the supposed economic benefits to the state from the Governor’s business tax cut proposals announced on January 6. Parrott suggested the Business Council’s analysis was “severely, if not fatally, flawed” since it did not factor in the reduction to state spending that would result from steep tax cuts.
When FPI, assisted by the Institute on Economic and Tax Policy (ITEP), used the same economic model, REMI, utilized by the analysts preparing the Business Council report, FPI modeled both the expenditure and revenue sides of the budget to determine the net economic impact. The Business Council study did not perform a “balanced budget” analysis, choosing to look at only the possible effects of cutting taxes.
In January 2003, Governor George Pataki proposed cutting state school aid by $1.84 billion. In April 2013, FPI published the ITEP analysis that showed that if income taxes were raised in a progressive manner (i.e., by raising tax rates on the richest households) in order to avoid $1.84 billion in school aid cuts, there would be a significant net positive effect on the state’s economy. The FPI-ITEP analysis found that raising $1.84 billion in progressive income taxes to offset Governor Pataki’s proposed school aid cuts would mean 56,000 more jobs in the state’s economy over the short run and 72,000 more jobs after 20 years. The larger positive economic effect over time reflects the beneficial effect that better-funded schools have on the economic “competitiveness” of an area.
The implication of a “balanced budget” approach like that followed in the FPI-ITEP study in modeling tax changes is two-fold: (1) that public spending matters and education spending in particular is an important factor in affecting an area’s economic performance, and (2) budget changes need to factor in both sides of the ledger, both revenues and expenditures. By ignoring the real world balanced budget constraint faced by state governments, the Business Council study is necessarily skewed and a poor guide for informed public policy-making.